The Poor Rich

Megan McArdle makes a serious case for why we shouldn’t be so quick to snark about income reversals among the wealthy. Excerpt:

I believe that Elizabeth Warren has made this point–when people get into financial trouble, they often say, “Well, I didn’t take fancy vacations or go to restaurants all the time or buy 17 pairs of Jimmy Choos.” But (with the exception of some really compulsive spenders) this isn’t the stuff that gets people into trouble. It’s the big house with the stretch mortgage that you convinced yourself you had to have because it was in a good school district and you needed a yard and a bedroom apiece for the kids. It’s that brand new SUV (or Volvo station wagon) you persuaded yourself to buy because it was important to have a safe car. It’s the school activities or travel sports teams that cost thousands of dollars, which you let your kids start in ninth grade because you didn’t know that you’d have to break their hearts by pulling them out in their junior year. The divorce decree you signed because you didn’t realize your income was going to drop by a third.

Pricey vacations can be cut back. Mortgage payments can’t. It’s not the luxuries that usually get people into trouble–it’s paying too much for “the basics”.

More:

And in New York, it’s really, really easy to pay too much. One of the guys in the article makes $350,000 and lives in 1200 square feet with three kids. This is the way the lower rungs of the lower middle class lives in the rest of the country. New Yorkers face an overwhelming temptation to push their housing budget to the limit, because what’s available on a conservative budget is really inconvenient unless you either make a whole lot of money, or lucked into a great deal in a down market or a transitional neighborhood.

That’s not to excuse the folks who spend too much on housing–apartments in vibrant New York neighborhoods are a consumption good, not an entitlement, and people who find the privations unbearable should move to the suburbs. But I certainly understand it–especially because people tend to take cues on what is “safe” or “reasonable” from the behavior of the people around them. Virtually every single person I know in New York spends well over a third of their income on housing. Which is one of the reasons I no longer live in New York.

Read the whole thing. That point about New York is definitely true. That’s one big reason we left there in 2003, even though we loved it. As much as we loved the city, we couldn’t foresee raising a family there on a journalist’s salary. Years later, I talked to a magazine about a senior-level job there, but to make it work economically, I would almost certainly have had to have lived a long commute away from the Manhattan office, and seen a lot less of my family than I would have wanted to.

This phenomenon is the biggest reason why I am extremely reticent to get back into home ownership. I’ve mentioned before how much money we lost when we had to sell our Dallas house in a down market. The six months it took us to sell the thing — and really, that wasn’t such a long time — did a number on our savings. Paying the Dallas mortgage, as well as Philadelphia rent. If we had to hold on to the house for a year or longer, it would have been a very serious financial situation for us — and we were in a much better financial situation than most people (e.g., we had no credit-card debt, owed very little in car payments, and I was making a good salary in Philly). We didn’t “pay too much for the basics” — in fact, our Dallas house was pretty cheap — but we found ourselves in a situation with a mortgage and a job situation that could have gone very bad very quickly. But if you had looked at our monthly income statements out of context, you would have thought, “How could they be in such precarious shape on that salary?”

That’s not exactly what McArdle is talking about in her post, but it does speak to her general point about people not getting into serious financial trouble over compulsive spending on luxury goods. We are rather risk-averse, and did everything conservatively — but still found ourselves in an anxiety-producing position. Man, the nights I tossed and turned, worried that we weren’t going to sell our house before we exhausted our savings! Having lived through that, it’s hard to imagine mustering the wherewithal to take a risk on another mortgage.

You can focus on the loudest numbers and conclude that young peoples’ aversion to home owning is an overreaction to a unique recession. Housing prices have fallen by a third in some cities. Couples have had a few years to pay off their debts. Mortgage interest rates are historically tiny. Could there possibly be a better time to buy?

Maybe not. But if the last 30 years have taught us anything, it’s that planning for the future is an act of faith. Supply chains and software eat our jobs. Financial wizardry eats our savings. The cost of insuring against these risks — that is, both college and literal insurance — is rising. “It feels like anytime we hit around $20,000 something terrible or some unexpected thing happens,” Steve Kinney, a Brooklyn resident, told theNew York Times last year. He’s part of a new renters society, and rental prices are rising now that housing prices aren’t. Three in five net jobs in the last two years have gone to people in their twenties and lower-thirties, “a crucial rental group,” according to an analysis of Labor Department data by G. Ronald Witten, an apartment firm consultant.

It’s no wonder that in an environment that punishes the long-term faithful, more young people are planning month to month.

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In 2000 I bought a 3400 sq. ft. house near Bayou St. John in New Orleans for $52,000. It was a crack house with over 20 drug addicts living in it but it had 12 ft. ceilings, gorgeous mantles, stunning pocket doors, beautiful hardwood floors and lots of potential. Built around 1880. The front and side porches were beautiful. I spent two years of my life renovating it. Every day before and after my job – 5am to 9pm. Moved in. Had a good couple of years. Katrina destroyed all my work. I took a huge chance investing in my neighborhood. Now there are other young home owners on my block, along with the few elderly couples who have lived here for decades. Our neighborhood is stabilizing.

Spent three years fighting w/insurance companies and contractors after living two years as an exile in Baton Rouge. I’m here now in my beautiful home with my family looking forward to marching in the St. Patrick’s Irish Channel parade. We had a good Mardi Gras.

I live in New Jersey and I spend a little less than half of my income on rent. That probably is because a lot of people who can’t afford to live in New York live here and work in New York. How’s that for trickle-down economics?

We have an economy that values transience. A friend of mine just learned that her company is moving her division to either Texas or South Carolina. She said that she will go because “no husband, no kids.” But others? Must be hard.

Rod, thanks for this post. It’s good to know there are others who live on a conservative budget and still have close calls financially. The NYC situation rings completely true too – wife and I almost didn’t make it through undergrad, and were glad to leave, though we miss the city.

I have very little sympathy for middle and upper class New Yorkers who 1) explain how fantastic their city is; and 2) whine about how expensive their city is.

New York has a lot to of opportunitues to offer its residents, and lots of people are will to pay for that. You don’t have a back yard, but you can visit some of the best museums in the world, enjoy some of the best arts in the world, eat at some of the best restaurants in the world (some of which are stupid expensive, some of which are cheap small places), etc.

All that comes with a price. And that means that middle and upper class New Yorkers have made a decision that they value living in or near New York more than time with their families (if they have a long commute), a modest-sized or large house, a yard, etc. I’m not knocking those decisions, but whining about the price of housing in New York is like me complaining that I can’t visit the Museum of Natural History on a whim.

This is not a serious article (if it was, it would be among the few that McArdle has written).

Of course it is difficult to cut back, but the issue is the relative difficulty. Are we to believe that a cut-back of ten-percent in income affects families with annual incomes of $25,000 and $250,000 equally? Certainly, even McArdle would agree that those in the upper income brackets have a lot more options in how they make their cuts, and probably a lot more resources to draw on to cushion the blow.

Also, I find it amusing that this whole “if it’s too expensive to live where you are, then move” argument is almost exclusively made by journalists and pundits who have the ability to work from pretty much anywhere. The NYC cab driver or toll taker is not quite as mobile as the writer who just has to figure out how to get broadband in his or her new digs.

Pay attention, Rod. This is THE MARKET screwing with your life. Not government, THE MARKET. Salaries and real estate determine how and where you and your family can live, what sort of job you can do, and how many children you can have. Pretty big stuff. Obama ain’t done nothin’ to me like the Market.

I understand your reticence. But I don’t think this is all that different than the way things have usually been. Having someone else build a house for you, then financing it, seems like a recent phenomenon.

Putting down roots has always been extremely risky. What if the water dries up? What if this industry moves overseas? What if… What if…

One of the main benefits of living in a small town is that a decent house doesn’t cost $600,000. If mine burned down tomorrow and insurance refused to pay for it, I would be hurting. But honestly, I would be paying less monthly than a lot of people do for their cars.

Also, if my industry goes away, I can do something else. I am pretty sure I could support my family on a crappy job. I am also pretty sure that I could trade on my family name and reputation and the fact that I am not on meth to upgrade to a semi-crappy job.

I would have to be willing to do something that’s not my passion. But that’s a non sequiter. The passion is the family and the place if there is any chance at all that I can make it work.

For me, the far stronger case against ownership is the fact that I hate fixing crap, and right now it’s just about all I do.

Also, my wife bought a piano from an elderly music teacher. It was made in Richmond, Indiana in the 1940s. Talk about permanent things! I bet it ways 800 pounds.

“Couples have had a few years to pay off their debts. Mortgage interest rates are historically tiny. Could there possibly be a better time to buy?”

Couldn’t agree more with that line right there. My wife and I have had a couple years to pay off our debits and are totally debit free with a sizable savings. I can’t think of a better time to buy right now. Especially out here in the ‘burbs of Dallas where the housing is pretty inexpensive.
As a matter of fact later this week we’re making an offer on a home.

Well when the socialist means for production are centrally owned and controlled (today money has long ceased to be a commodity like gold, now its worthless FIAT paper backed by the computer databases at the Fed’s yet mandatory as legal tender) but the proletariat believe “owning” property is equivalent to paying a bank to live on property that is encumbered to the State (tax-lienable, deed NEVER held alloidially free and clear) you have a very clever set up for the powers that be to enrich themselves at citizens expense, which is exactly what has happened since Bretton Woods collapsed the whole world over… but its coming to an end. Why? You answered your own inquiry, they killed the real economy:

“It’s no wonder that in an environment that punishes the long-term faithful, more young people are planning month to month.”

Now its just each out for themselves in a race to the bottom, with the wealth stored off-shore (e.g. Romney) for safe keeping. Ron Paul asked Bernanke why Mexico now permits citizen-savings in silver and (and China and Russia and Iran citizen-savings in gold) when the US will follow? The brave Chairman indicated he’d be willing to go off-line on that topic but not in front of the cameras where the duffus might wise up to what’s going on….

Read Currency Wars. And ask yourself who’s going to pay the pension shortfalls at the DOD for past warfare waged but not paid for :http://www.defensenews.com/article/20120227/DEFREG02/302270001/New-Accounting-Rule-Could-Cost-DoD-Billions?odyssey=tab
Capital is accumulated not borrowed from some one else. Housing is never ‘savings’ its a consummable – you need to replace all the internal and external elements as you consume them over time. Capital in investment in labor, industry, ingenuity, enterprise that develops a previously undeveloped good into something more valuable., Your residence doesn’t qualify unless you’re ‘flipping’ in a volatile real estate market that’s volatile on the way up not on the way down…

Austrian economics 101. Menger’s Kapital Theorie. 100 yrs of wisdom ignored by the mainstream to help pay for WWI WWII and so on and on.

Not my opinon – much more qualified minds such as former co-president at Morgan Stanley foresee a necessary “resign” of the global financial system before the cyclical/secular dynamic shows any signs of economic recovery (IOW all the hopium, is just that. Hope. Opium for the masses, sound Marxist? Well yes that’s the point… the State is the new religion)http://www.market-ticker.org/akcs-www?post=202722 “How Did This Happen? (Truth on CNBC?!)”

And the new split two-tiered Bond Market needed to implement such cataclysmic redesign? Well thank the ISDA rulings fresh off the newstickers, that all fell into place:http://www.market-ticker.org/akcs-www?post=202783 “All your Bonds are belong to us”

Now if a ‘global public authority’ were to help adjudicate who’s money is actually whose, who’s bond is worth 100% and who’s zilch, kinda a Solomonic power for global commerce, then its all good right? But absent such cooler “long-term faithful” heads prevailing its going to become far worse before it gets better…
The Germans may even jump ship… and let the sh*t hit the fan (their fan, or superior mercantilist economic engine versus our sh*t, indentures and fixed paper used to arbitrage the excreted waste of undigestible products of unviable means of production).

In other news, Louis XVI and Megan McArdle were seized in Varennes while apparently fleeing from Paris. Minimum wage earners and and unemployment claimants reportedly refused to remove their hats as the royal carriage was lead back to the Tuileries Palace in ignominy. They were followed by a drum circle from Occupy. McArdle reportedly claimed they were “going to talk to an Austrian economist” and that they were not actually fleeing the country.

…but when you start paying for more than 2000 sq. ft. then it’s entering luxury territory. Having an overpriced car is not a valid excuse either. These days, you can get just as good a car by buying one that’s a year or two used. Yes, the prices have gone up, but they’re still a better bargain, and if you maintain the car, it can last you ten years or more.

Rod’s situation is a little different. He’s been living something of a peripatetic life. I would not have advised his buying a house in Dallas if he knew he was going to move. I’m not sneering at him, and I understand he had a good offer in PA, but it’s not really typical of most Americans who can shop for a house and a car that they can stick with for a decade.

Pay attention, Rod. This is THE MARKET screwing with your life. Not government, THE MARKET. Salaries and real estate determine how and where you and your family can live, what sort of job you can do, and how many children you can have. Pretty big stuff. Obama ain’t done nothin’ to me like the Market.

He backed Fannie Mae and Freddie Mac, and he took money from guys like Mozilla. He screwed with the used car market with his cash for clunkers program, that removed a number of perfectly serviceable automobiles from circulation.

Also, he’s been in charge for over three years, including two years with a near supermajority, so when exactly does your boyfriend take some responsibility for the situation?

And that’s not my opinion either, its that of ueber-mercantilist former BancoSander chief (sole-propietor of formerly-American held banks — such as local PA SovereignBank) now chief functionary for similar things, such as following arcane rules for money laundering* for the Vatican “Envisaging any other scenario would allow one to foresee social tensions difficult to handle.”http://www.news.va/en/news/the-strategy-of-solidarity

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* not setting ISDA rules for bond laundering mind you, for that’s not a global public authority merely a private association of default swap underwriters, unregulated and unaccountable to anyone except themselves and their own Keynsian “animal spirits.”

it’s not purely THE MARKET. NYC has rent controls, which decrease teh supply of housing and increase the price of non-rent controlled housing. it also has a lot of zoning restrictions on the height of buildings, which again decreases the supply of, and increases the price of, housing. many other major cities have similar zoning restrictions that drive up the price of housing in those areas.

oops forgive me St Andrew, that’d be Santander he of cruciform-martyrdom fame so beloved of vexillologists — heck they loved him so greatly we Brits had to come up with our fancy pants Union Jack to give him equal billing – well not actually proportionate, the saltire St Patrick is Burgundian a Spanish martial honor of the same courageous St Andrew Scotland – and Byzantium- love -with Albion’s St George. A two-thirds Catholic humility superceded by one-third Protestant patriotic pride, but its still our flag and its still our history. Americans decided to ditch its incoherence for liberty, equality and fraternity under stars and stripes.

I’m not sure why anyone should have any feeling but disgust. He has to pull his kids out of private school and live in a small apartment. Middle class families are becoming homeless and unable to afford medical and dental care and food insecure.

We are rather risk-averse, and did everything conservatively — but still found ourselves in an anxiety-producing position. Man, the nights I tossed and turned, worried that we weren’t going to sell our house before we exhausted our savings!

Exactly right.

A person can be totally responsible, building a life well within their income, but the loss of a job drains their savings and the decline in the value of their assets removes whatever hedge against ruin they had.

Hard times are not the time to be priding oneself on what amounts to luck; the tornado could have just as easily leveled your home as someone else’s. The notion that hard times are the fault of the victims is most often an exercise in whistling past the graveyard…whether the victims were relatively poor and uneducated or relatively wealthy and educated.

I think the point McArdle is making – and it’s a perfectly reasonable one – is simply this:

Having to downsize to a normal sized house or apartment from a very large one, or having to move your kids from an expensive fee-paying school to a public school or one with lower fees, is nowhere near as bad as becoming homeless, or going on food stamps, or struggling with fuel bills, or not having money to spend on anything besides staying alive. But nor is it entirely trivial, and there is every reason to extend some human sympathy to people who find themselves in a difficult position.

ditto John E: ” about income reversals among the wealthy” they never were wealthy, just highly compensated. What they did with their disposable income? Oh sorry they didn’t have any right, they disposed of it on fixed expenditures each and every month. Not even their 401K is “wealth”, its defined fixed cost (better idea woulda been to go work for private mercenaries and the Military Industrial Complex – they negotiated cost-plus, like all the public contractors such as teachers etc enjoy – any unfunded shortfall, they’ll be back to expropriate you a second time from any of your future compensation to cover the lifestyle your gummint promised them. Wealth is ephemeral in a FIAT currency world – you got sit on the right side of the fence with those who know how to tack with the winds…

But Niall “nor is it entirely trivial “ that’s why they’re accredited to be able to be so well compensated, they’re supposed to have studied a trivium and understand the small print and guage the risk they’re committing themselves to. But the issue is that the truth of the trivium doesn’t apply anymore when the Fed can divide by zero.

If not pls use punctuation to indicate your comment such as Re: Fred.
p.s. appreciate the wry humor – in reality housing 20 indigents at no cost is a form of economic ‘savings’ or positive wealth creation. Although the municipality may still be short on its property tax revenues depending on how much of the illegal capital gains of the tenants made it via the landlord to the gummint (not counting legal costs of foreclosing on said landlord if his liens remain unpaid. Costs incidentally cities usually won’t incur if they don’t hold the lien, having bundled it into a collateralised debt obligation as a municiple bond issue – why so many of our urban areas are blighted in the first place with ‘abandoned’ property that really isn’t. Its the valuable marked-to-model ‘income generating asset’ our pensions are stuffed with earning 0.5% (not marked to market’ cos then the city would have to call the sheriff sale and do some price discovery and let the cat out of the bag) – Philadelphia has been wracked with this madness for most of the last three generations of Democratic administration. Collapse is all around but no one wants to tell the truth.

A nice row home in badlands Philly sells for less than a new car from gummint motors in Detroit – the neighborhood, that’s another matter. But the ageing bricks and mortar are more resilient than the wood-framed stucco box we reside in with Housing Association maintenance paid for by the collective – you get the repairs that they Board deem acceptable, whether they’re shoddy or not. The banks haven’t yet cottoned on to the risks in the upscale depressed real estate, but the GSEs have – new regs re

A a long-time reader of Rod’s various blogs, may I respectfully suggest you follow the etiquette around here? Go back to a few other posts and observe that thought spamming isn’t really done here. Feel free to post your views but 13 comments (many of them consecutive) in one thread implies that you are simply shouting over the conversation in the comments sections and not participating in it.

It’s relative, to some extent. As much as middle class Americans might dislike these seemingly rich New Yorkers’ complaining about having to take a step down in life, people who live in the Third World on a dollar a day would probably be upset to see middle class Americans complaining about not having good enough health insurance, having to get a smaller house, etc.

It’s no wonder that in an environment that punishes the long-term faithful, more young people are planning month to month.

It’s pretty hard to summarize the root of the myriad problems facing our culture more succinctly than the line highlighted above.

Since the end of WWII we have slowly but surely reorganized society to reward short-term gratification and punish long-term discipline on every level. The sexual revolution and the Reagan revolution were the symptoms of the larger problem, which is that we have declared instant gratification to be the sine-qua-non of happiness.

I’m 30. I’m tempted to buy, but it’s a big risk. I’ll wait till I’m married. This is my line of thought, and I suspect it’s the line of thought for most people my age. (Who also tend to delay marriage until financially stable, and who simultaneously face a higher than average unemployment rate in this economy.)

My roommate got a better job offer in a different city and will be leaving in a few weeks. When she goes, it will be the first time I am living in an apartment on my own, rather than with a roommate. And I’m no New Yorker: I live in Texas. Before I moved in here a few months ago, I was living with relatives. Before that, half of a college dorm room and then half a barracks room in the Army. Yes, it’s taking my generation quite a bit longer to “grow up” in the sense the last two generations did. But then again, you go further back to before World War II, and living with your parents or a sibling until you were married, and even after you were married, was not the least bit unusual. And still isn’t in much of the world.

A mortgage is not freedom. It’s debt. And you can’t bill your landlord when your hot water heater explodes. And you can’t walk away from that debt with no repercussions like you can a lease (other than maybe a few hundred dollar penalty for breaking the lease) when you get transferred, or relieved of your livelihood through job loss or disability.

When I do buy, I’m buying a multi-unit home (2 to 4 units), closer in to the city center where the housing stock is cheaper, in a neighborhood with a cafe, post office, grocery store and/or library within walking distance. That’s where the future money’s at. Gas prices will not drop much in the longer term, and will remain unstable enough to have an impact on extra-urban development. Millennials have an aversion to the suburbs, the Boomers will in decades to come find their suburban houses too big and spread out, and Gen Ex is too small demographically to sway things overly much. Finally, a large portion of the employment growth is projected to be in the service sector, not exactly the kinds of jobs which will support owning nice big houses 30 to 45 miles out.

Re: And you can’t walk away from that debt with no repercussions like you can a lease (other than maybe a few hundred dollar penalty for breaking the lease)

Unless the lease has a clause allowing early termination with notice you may be on tap for the remaining months’ rent payments. A friend of mine was sued for $3000+ for walking away from a lease. This also shows up on your credit record as a judgment against you, which is major hit to your rating, and will definitely prejudice future landlords against you.

I will follow AnotherBeliever’s strategy exactly, but lucky for me my husband and I have a couple of years jump on him. We are already married, have cash in the bank, and are just waiting for him to finish his grad degree. Also – I don’t actually want to live in the neighborhood he describes, not unless the schools are good. (In the neighborhood he describes, I doubt that houses will be cheaper than in the ‘burbs unless the neighborhood is unsafe or otherwise undesirable. It is not fun – or profitable – to be a landlord in an undesirable neighborhood.) Also, my husband and I prefer more open space. But I will have absolutely no problem renting to the peripatetic Millennials and having them pay the properties’ mortgages…

Oh, and re: Claire Krishan’s comments… what is going on there? I thought these comments were moderated. Whatever, whenever I see her name I will just ignore whatever is underneath it.

The key operative words here are *good school district.* Families who are affluent enough to have one parent at home can homeschool. Others can pay private school tuition. Others yet will pay premium for a house in a good school district. Either way, it all boils down to economic privilege, in most cases.

What no one wants to admit is how radically different US public school districts are, even within the same metro area. But given that the vast majority of students go to public schools, their quality in a given area/ district becomes the engine that drives the housing-price train.

A typical conservative approach (like that taken by Rex Sinquefeld in Missouri) is to trash public schools, and even lobby for legislation whose effects would be to destroy good public school districts, all in the name of “school choice” and various kinds of income redistribution (like eliminating the property tax as the basis for school funding, and instead replacing it with state income or sales tax funding.)

So yes, as long as there are good school districts, people will pay premium prices to live in them. The sad reality is that when the poor can go to any school district at will, only the poor will go to public schools.

The local schools are adequate, and the high schools have all manner of AP and Honors courses. This is Texas, where a lot of funding for education (and everything else) has been cut. But, it’s also Texas, so charter schools are a dime a dozen, and a few have even been around long enough to have performance stats on record. There’s also Catholic schools, which are reasonably priced.

My current neighborhood is working class, housing stock dating back to 1930s and 40s. It’s been majority Hispanic for decades, with the tradition of multi-generation homes – more than half the houses are two story duplexes or single story ranches with a “mother in law” apartment out back. More often than not these days homeowners rent out their extra space to non-relatives for a little extra income. Lot sizes are about .15 to .25 acres on average, laid out on a compact grid. There’s full on apartment complexes scattered throughout. Since it’s an older area, businesses are mixed in along the major roads. Added bonus, it’s right off a major street they will soon open a Rapid Transit Bus line on, which will run between downtown and the major medical center. Development along that route is bound to shift Yuppie (good for business!)

The kids I interact with in the neighborhood seem nice and reasonably well behaved. There’s a touch graffiti here and there but I have yet to catch anyone in the act of a drug deal, which is more than I can say for the last city I lived in. When they think no adults are watching, I’ll sometimes catch them giving each other the finger jokingly or pulling some small prank. But not exactly delinquents. I’d be delighted for my future children to befriend the likes of them.

And actually the houses here inside the inner highway loop are just a bit over half what you would pay in the suburbs. I’d have to live in one of the multi-family units, actually, it’s part of the VA Home Loan deal. So I’m thinking one of the nicer two story duplexes with the cottage out back. That or tearing down something and putting in a row of three or four traditional townhomes. We’re short of townhomes with yards here. It’s either apartment with itty bitty balcony or rent a part of a house with a yard. People would probably flock to the middle ground choice and I’ve always liked townhomes.